RBI's Basel III norms to lower banks' capital requirement from 2027

RBI's revised Basel III norms, effective April 2027, to lower capital needs for banks with reduced risk weights on MSME and housing loans, boosting CET1 ratios

The implementation of the Reserve Bank of India’s (RBI’s) proposed Basel III capital norms is expected to reduce the capital adequacy requirement of banks. This would lead to lower risk weights on residential real estate (including housing) and MSME segments, which could bring 10–50 basis points (bps) Common Equity Tier 1 (CET1) improvement across banks, according to analysts.

 

During the monetary policy last week, the RBI announced plans to implement revised Basel III capital adequacy norms for commercial banks from April 1, 2027. A draft on the standardised approach for credit risk will also be issued soon.

 

According to analysts, under the proposed norms, lower risk weights for certain sectors, particularly MSMEs and residential real estate including home loans, are expected to reduce overall capital requirements.

 

Lower risk weights to aid capital efficiency

 

“The revised Basel III norms, particularly regarding credit risk on capital charge, will also be applicable by April 1, 2027. This is likely to lower risk weights on segments such as MSME and real estate, aiding banks,” Bank of Baroda said in its report.

 

Voicing a similar opinion, IIFL Financials said, “Based on our sensitivity analysis, assuming a flat 5 percentage point cut in risk weights across loan-to-value (LTV) ratios for residential mortgages and MSME loans, we expect 10–50 bps CET1 improvement across banks.”

 

PSU banks expected to benefit more than private peers

 

Some analysts believe that public sector banks are likely to benefit more than private sector peers on account of their higher exposure to the MSME segment.

 

“The RBI continues to incentivise credit flow to certain segments of the economy, within which MSME remains a key segment. PSU banks are relatively more leveraged to the MSME segment compared with private sector banks and hence, stand to benefit more from this step,” said Shivaji Thapliyal, head of research and lead analyst, Yes Securities.